When the top personal tax rates are above the corporate rate, high-income individuals have an incentive to reclassify their earnings as corporate rather than personal income for tax purposes. U.S. tax law at least imposes strict limits on the extent to which employees in publicly traded corporations can engage in such income shifting. However, entrepreneurs setting up new firms can easily reclassify their income for tax purposes. This tax incentive therefore favors entrepreneurial activity. The paper discusses how best to subsidize entrepreneurial activity while avoiding other economic distortions.
Taxes and Entrepreneurship reviews the existing empirical literature on the impacts of tax policies on entrepreneurial activity and presents an agenda for future research.
By serving as a conduit for knowledge spillovers, entrepreneurship is the missing link between investments in new knowledge and economic growth. The knowledge spillover theory of entrepreneurship provides not just an explanation of why entrepreneurship has become more prevalent as the factor of knowledge has emerged as a crucial source for comparative advantage, but also why entrepreneurship plays a vital role in generating economic growth. Entrepreneurship is an important mechanism permeating the knowledge filter to facilitate the spill over of knowledge and ultimately generate economic growth.
Seventeen in a series of annual reports comparing business regulation in 190 economies, Doing Business 2020 measures aspects of regulation affecting 10 areas of everyday business activity.
Entrepreneurial activity is presumed to generate important spillovers, potentially justifying tax subsidies. How does the tax law affect individual incentives? How much of an impact has it had in practice? We first show theoretically that taxes can affect the incentives to be an entrepreneur due simply to differences in tax rates on business vs. wage and salary income, due to differences in the tax treatment of losses vs. profits through a progressive rate structure and through the option to incorporate, and due to risk-sharing with the government. We then provide empirical evidence using U.S. individual tax return data that these aspects of the tax law have had large effects on actual behavior
A common concern about tax policies is their influences on entrepreneurial activity. Basic theory of taxation posits that a tax alters individual behavior, often yielding less output than in the absence of the tax. Income taxes may provide a disincentive to work, and they also limit an individual's total capital in the absence of the income tax. This likely decreases the total amount one has to invest in businesses and entrepreneurial activities. This study examines the relationship between income taxation and entrepreneurship. It utilizes a panel dataset constructed from the Census Bureau's Statistics of United States Businesses as well as Tax Foundation's dataset on state income taxes in addition to other datasets on state and federal taxes, federal loan expenditures and state populations. Using OLS, random and fixed effects regressions, this paper will examine the hypothesis that there is a negative relationship between small retail establishment creation and U.S. State personal income tax rates for the years 1998 to 2007. The findings are inconclusive indicating that, while income tax may influence small retail firm birth, there are likely other significant influential factors as well. A combination of state tax policies may potentially impact retail establishment birth while access to start-up capital is a significant variable for entrepreneurs. Policies crafted to encourage retail entrepreneurship should focus on all facets of tax reform as well as factors that impact access to capital.
